Sustaining economic growth

Posted on May 28, 2017

-This article was originally published by Ashesh Shrestha in The Himalayan Times on May 28, 2017.

The World Bank has projected the economic growth for the current to be as high as 7.5 percent. This is a record high in the last 23 years. It is definitely a very good news for a country trapped in low level of economic growth. With a preceding growth rate of just 0.4 percent, this is still not a news to be very happy about as the real problem lies in sustaining such high rate of growth. Experts further claim that reasons behind such a big leap are favourable climatic conditions and ensuing increased agricultural produce, increased availability of electricity and take off of the reconstruction works. These are mostly exogenous shocks which have brought sudden hike in economy.

We might not be treated with these sorts of positive shock again and again. For sustained economic growth, there are certain basic institutions that must be strengthened. Even though economic prosperity has been the new major agenda of all the political parties, these institutions have been overlooked. No reforms have been made in existing policies and laws that could improve these.

Security of property rights

Secured property rights is one of the basic foundation of economic prosperity. When property rights are strongly enforced in the sense that the owner of the property has all the rights to use his/her in the way he/ she desires, it creates a strong incentive not only to protect and preserve the property but even to expand it. When the individuals have incentives to expand their property, they are willing to use the properties they have to make investments. The investments, not only help expand their own property but also create jobs, increase productivity and contribute to the overall economic growth.

The explanation of the importance of property rights would be incomplete without taking reference from the seminal work of Peruvian economist Hernando De Soto. De Soto, in his book, ‘The Mystery of Capital’ explains the role of strongly enforced property rights in bringing prosperity in the west. He further explains that the poor all over the underdeveloped world possess 9.3 trillion dollars’ worth of property, however due to lack of well-defined property rights, they have not been able to use it to create more wealth.

Nepal also lacks strong property rights. The biggest threat to the property of individual is a big government itself, the body which was supposed to protect the property rights. The government, in the name of greater good of the public, introduces programs that directly infringe on the property rights of the people. The most popular example is the ‘road expansion program’, in which government confiscated land and destroyed buildings of the people for expansion of roads without their will.

Contract enforcement

Another, important condition required for economic prosperity is strong enforcement of contracts. For effective and efficient enforcement of contract, there should be proper judicial system that could act as a mediator between the contracting parties whenever dispute arises between them and provide unbiased and fair decision promptly. Strong Contract enforcement gives the confidence to the parties to engage in big investment contracts with each other. It provides a sense of security to the contracting parties. Hence, it is very important factor for inducing economic growth.

However, the status of contract enforcement is poor in Nepal. According to World Bank’s Doing Business Report 2017, Nepal ranks 152nd out of 189 countries in terms of contract enforcement. On an average, it takes 910 days to resolve a dispute. Furthermore, the cost of going through the entire judicial process costs 26.8 percent of the total claim. High cost and large number of days for dispute settlement work as a disincentive to the people to get into a formal contract and hence they are unwilling to take joint investment decisions, which can adversely affect economic growth.

Competition among States

Nepal has headed from a unitary system to federal system of government. However, there is still a lack of clear policies. Furthermore, the most important factor that determines the success of federalism is how well the sub-national governments compete with each other. In unitary system, the government is a monopoly- sole supplier of the taxation policy, public goods, judicial system etc. Without competition, there is very less incentive for the government to provide these facilities effectively.

In federal structure, there are several provinces—the government of each province has autonomy within its jurisdiction to decide on the nature and type of taxation policy, public goods and judicial system among other services. This creates competition among provinces for more businesses and citizens. This competition provides strong incentives to the sub-national governments to make decisions that are most desired by the people. This will attract investors and businessmen who will create jobs and increase production, eventually contributing to higher economic growth and prosperity.

However, no clear framework has been devised to ensure free and fair competition among provinces. There are differences between provinces in terms of availability of natural and human resources, financial and fiscal capabilities, infrastructure and population. These discrepancies put some provinces at greater advantage. To reduce this, strategies regarding equitable distribution of federal fund to the provinces have to be formulated.

Conducive Business Environment

Conducive business environment is crucial in order to achieve high level of economic growth and to excavate economic potentiality. When the policy regime is investment and private sector friendly and the political environment is stable, entrepreneurs and businessmen from within the country and outside will be willing to invest more as investments are secured and good return is guaranteed. However, when the country is characterized by political instability, along with unfavorable business environment and unfavorable policies, investment is directed to other countries and the productive resource, viz. capital and labour will move out from the country. Hence, it is imperative to have private sector friendly business environment for achieving higher economic growth.

These are the basic factors without which sustained economic growth and prosperity cannot be imagined. If the government and political actors truly aspire to achieve economic prosperity, they cannot overlook all of these things. These aspects should be thoroughly taken into consideration, and policies should be formulated in such a way that they support all of these.